DELOITTE SOUNDS ALARM ABOUT CANADA'S ZOMBIE COMPANIES

16% of publicly traded firms more than 10 years old don’t make enough revenue to cover the interest on their debt

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-- SOURCE: 09-18-18 Financial Post - "Deloitte sounds alarm about Canada's 'zombie' companies" --

Canada’s economy is in the throes of a zombie outbreak and it’s threatening to devour the country’s productivity.

That, more or less, is the conclusion of a new report from Deloitte, which found that at least 16 per cent of publicly traded firms here could be classified as “zombies” — defined as mature firms more than 10 years old that lack sufficient revenue to cover interest payments on their debt.

The concept comes from a 2017 report by the Organization for Economic Co-operation and Development (OECD) that explored how inappropriate insolvency structures in Europe kept companies intact when a competitive marketplace would have forced them to liquidate or restructure.

In Canada, Deloitte looked at 2,274 companies listed on the TSX and TSX Venture Exchange from 2015 to 2017, and found that 350 firms fit the definition.

But this likely understates the full extent of the issue, Deloitte said, because only a few thousand Canadian companies are publicly traded.

Duncan Sinclair, chairman of Deloitte Canada, didn’t offer a theory for why Canadian companies are more likely to wind up as zombies than their OECD counterparts, where on average 10 per cent of companies meet the definition.

Sinclair said that to be successful, companies need to do more than simply survive.

“To be a company of long standing, of longevity, doesn’t necessarily mean you’re a company that’s doing well,” he said.

“The question is, what can you do as a business leader in that reality to try and reinvigorate and renew and restart that organization, and that’s where we were trying to come up with positive recommendations and comments about what people could do.”

Sinclair said these companies can be a big problem, because they’re not growing or innovating, but they still tie up capital and labour talent that could be put to better use.

“These companies have about $130 billion in capital tied up in them that isn’t part of driving a more productive, vibrant, growing economy,” he said.

“We’re not being critical of what these companies do or the products they deliver, but more that for Canada overall, we need to find a way to get more of these businesses more reinvigorated.”

Overall, the report from Deloitte paints a fairly dismal picture of the Canadian competitive landscape, based on a survey of 700 businesses conducted in April of this year.

“We’ve warned business leaders and policymakers about Canada’s lagging productivity, and we’ve cautioned companies about the impact of the coming age of disruption. Today, challenges that were once on the far horizon are now on our doorstep — and we’re still not ready.”

Challenges that were once on the far horizon are now on our doorstep — and we’re still not ready

Deloitte Canada report

Deloitte focused on five qualities that globally competitive companies need to embrace — disrupt with resilience, pursue tough decisions, nurture your roots, drive purpose and impact, and finally, assert global leadership.

Overall, Deloitte found that Canadian firms have a mixed record on how well they embrace these five qualities, but on the last one, the results are particularly poor.

The report reveals that 48 per cent of the companies surveyed are not investing anything in exploring new markets outside of Canada, and only 22 per cent are pursuing international expansion “to a great extent.”

“Shifting trade dynamics that are pushing economic power from the West to the East and the increasingly global nature of innovation are making an international focus more important than ever,” the Deloitte report said. “Despite the known benefits — and growing imperative — of going global, only 3.6 per cent of Canadian companies export.”

The report also offered some data that suggested Canadian companies struggle to embrace a mindset for innovation, and management in many firms is too risk-averse.

When Deloitte asked C-suite and senior management at Canadian firms whether the leadership team speaks “openly about failure or setbacks” to a great extent, 54 per cent of executives said that they do. But when Deloitte put the same question to middle-management and below, only 37 per cent of respondents said their company leaders were good at talking about failures.

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